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Risk preferences and contract choices

Published online by Cambridge University Press:  14 March 2025

Jean-Louis Bago  and
Bruce Shearer Open the ORCID record for Bruce Shearer [Opens in a new window]
Jean-Louis Bago*
Affiliation:
Ministry of Revenue, Government of Québec and CRREP (Laval University), Québec City, Canada
Bruce Shearer*
Affiliation:
Economics Department, Laval University, CRREP, CIRANO and IZA, Québec City, Canada
*
[email protected]
[email protected]
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Abstract

We conducted a series of field experiments to investigate the ability of experimentally measured risk preferences to predict the contractual choices of workers in the real labour market. In a first set of experiments we twice measured workers’ risk preferences using the lottery approach of Holt and Laury (Am Econ Rev 92(5):1644–165, 2002). These workers subsequently participated in a contract-choice experiment, making 12 decisions. For each decision, the worker chose between his/her regular piece-rate contract and a particular fixed wage contract, each distinguished by the level of the fixed wage. One of the twelve decisions was then chosen at random and the worker was paid according to his/her choice for that decision over a period of two working days. We estimate the effect of risk preferences on contractual choices, controlling for measurement error and worker ability. Risk preferences effectively predict contract choices—risk-averse workers are more likely to select fixed-wage contracts. High-ability workers prefer piece-rates.

Keywords

Risk preferencesIncentivesContractsSortingField experiments

JEL classification

D86: Economics of Contract: Theory J33: Compensation Packages • Payment Methods C93: Field Experiments
Type
Original Paper
Information
Experimental Economics , Volume 25 , Issue 5 , December 2022 , pp. 1374 - 1398
Copyright
Copyright © The Author(s), under exclusive licence to Economic Science Association 2022.

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Footnotes

Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s10683-022-09768-5.

We thank Roberto Weber, Marie Claire Villeval and two anonymous referees for their helpful comments and suggestions. We also thank Sylvain Dessy, Claude-Denis Fluet, Bernard Fortin, Sonia Laszlo, and Luca Tiberti, as well as participants at the the Societé canadienne des sciences économiques (Ottawa, 2017) and the Canadian Economic Association Meetings (McGill, 2018). Financial support from SSHRC (Shearer), FRQSC (Shearer) and CRREP (Bago) is gratefully acknowledged. The replication material for this study is available at https://osf.io/vewp9.

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